The FSA could hardly have been more damning in its final notice concerning Libor-related failings by UBS and wrongdoing by the bank’s traders and managers, who had “manipulated [rate] submissions to benefit their own positions, showing total disregard for millions of market participants around the world”.

The scale of the wrongdoing over a period of several years and involving dozens of staff was a factor taken into account by the regulator in determining the level of sanction for UBS, whose £160m FSA fine was part of a Sfr1.4bn ($1.5bn) in total fines and settlements with regulators in the US, UK and Switzerland.

Sergio Ermotti, chief executive of UBS, said in a statement today that the bank “deeply regrets this inappropriate and unethical behaviour".

Financial News has analysed this morning’s final notice in which the FSA explained its penalty for the Swiss bank, and outlines below the scale and nature of the misconduct.

• Why has the bank been fined?

UBS, through managers and staff, attempted to manipulate Libor and Euribor from 2005 to 2010 in connection with rates submitted by the bank and other banks that were used to calculate the market’s overall interbank rates.

Tracey McDermott, FSA director of enforcement and financial crime, said in a statement: “The integrity of benchmarks such as Libor and Euribor are of fundamental importance to both UK and international financial markets. UBS traders and managers ignored this. They manipulated UBS’s submissions in order to benefit their own positions and to protect UBS’s reputation, showing a total disregard for the millions of market participants around the world who were also affected by Libor and Euribor.”

McDermott said the bank’s misconduct was “all the more serious because of the orchestrated attempts to manipulate the Yen Libor submissions of other banks as well as its own, and the collusion with interdealer brokers and other panel banks in coordinated efforts to manipulate the fix”.

Related

By being found to have manipulated submissions to benefit trading positions, UBS breached the fifth of the FSA’s principles, or rules, for businesses, namely failing to observe proper standards of market conduct.

UBS also breached Principle 3 by failing to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management. For three-and-a-half years from January 2005 to August 2008, for example, UBS had no systems, controls or policies regarding Libor submission procedures, and where Euribor is concerned this was the case throughout 2005 to 2010.

As the FSA put it: “The manipulation of submissions was routine, widespread and condoned by a number of managers with direct responsibility for the relevant business area.”

• Who was involved in the misconduct and what did they do wrong?

The FSA found that at least 45 UBS staff including traders, rate submitters, managers and senior managers at UBS were either involved in or aware of the attempts to influence rate submissions, which the regulator called “routine and widespread manipulation”.

UBS traders made at least 2,000 requests for inappropriately low or high rate submissions, either to other staff at the bank involved in setting the submissions, or directly or indirectly via interdealer brokers to influence staff at other banks that were involved in feeding Libor quotes into the market-wide, rate-setting process.

In one example of such manipulation through collusion, a UBS trader explained to a broker in no uncertain terms – in the days after the collapse of Lehman Brothers in September 2008 – how he wanted him to try and manipulate a benchmark rate and what he would give him in return.

According to the FSA, the trader said: “If you keep 6s [the six-month yen Libor rate] unchanged today...I will f*cking do one humongous deal with you...Like a 50,000 buck deal, whatever...I need you to keep it as low as possible...If you do that.... I’ll pay you, you know, 50,000 dollars, 100,000 dollars...whatever you want...I’m a man of my word.”

UBS entered into at least nine such transactions, called “wash trades”, handing over illegal fees of at least £170,000 to the brokers in question, the FSA said.

• How was it done?

Requests for certain Libor levels were made both to other UBS staff and externally, both via electronic communications and orally.

One trader alone, the FSA found, made more than 80 requests to traders at other firms to try and influence other banks’ Yen Libor submissions.

On one occasion, the FSA highlighted a conversation in July 2007 when a broker at another firm contacted another bank to request a Yen Libor submission on behalf of the UBS trader.

Other attempts to try and influence other banks’ rate submissions included asking brokers to make false bids and offers for cash trades, known as spoofs, to skew market perceptions and affect other banks’ observations of the market and subsequent submissions.

UBS traders and inter-dealer brokers spurred each other on by telling each other to “BE A HERO TODAY” and referred to each other in congratulatory terms including “the three muscateers [sic], SUPERMAN, captain caos [sic].” "Captain caos” appears to be a reference to Captain Chaos, the alter-ego of a fictional character, mechanic Victor Prinzim, from the film Cannonball Run.

They repeatedly plead, thank and congratulate each other for helping to fix Libor submissions, with comments such as “v v v important pls try extra extra hard mate”, “thx any help much appreciated” and “Anytime I can return the favour let me know.”

• Why were they doing it?

The FSA gave two reasons for the manipulation by UBS staff: to protect the bank’s reputation and boost their own trading results.

The regulator cited an email sent in December 2007 by a manager at UBS to a senior manager in which he wrote: “How much pressure can we exert on [the] money markets and commodities [team] to raise up our 3m yen fixing over the next week? We have 2mio/bp of fixing risk expiring on Dec imm. We have been riding a wave on this trade, but everyone will be trying to influence the fixing next Monday [17 December 2007] reflecting their positions. If we don’t do the same we risk an adverse PL [ie an adverse impact on UBS’s profits].”

The senior manager replied that he would try to talk with another senior manager about the issue, and just days later UBS’ three-month Yen Libor submission increased by 2bps. This meant the figure was included in the calculation of the overall rate, having been previously excluded because it was in the bottom quartile of submitted rates.

Another email sent by a manager in October 2008 read: “We really need some co-operation on the yen libors from those who input... as someone says we need to be in the middle of the pack. Is it possible we can get an exception for Yen?”

Later that day the manager sent another email stating that he “got some concession on this in the end we will be a bit lower. Every bit helps”.

On the reputational front, the deepening of the financial crisis in mid-2007 influenced the bank’s attitude to Libor submissions, the FSA found. Heightened media speculation of banks’ interbank borrowing costs prevailed at a time of reduced liquidity in the market.

The FSA cited an email in August 2007 from one manager at UBS to another manager and three senior managers, saying: “It is highly advisable to err on the low side with fixings for the time being to protect our franchise in these sensitive markets. Fixing risk and PNL thereof is secondary priority for now”.

• How was it allowed to happen and why wasn’t it picked up?

UBS’ group internal audit team conducted five audits of the relevant business areas between 2005 and 2010, yet did not detect the widespread manipulation activity. Nor was it picked up by the bank’s compliance team. UBS’s systems and controls spotted none of the wash trades, said the FSA.

The bank’s legal and compliance team, prompted by media attention about banks’ Libor submissions, conducted a review of its Libor processes and procedures that concluded in August 2008 and included considering management of potential conflicts of interest, namely the risk of submissions being influenced by trading positions.

The FSA highlighted several reasons the review was inadequate:

1) Its scope was limited to US dollar Libor submissions. It did not consider whether there was any linkage between derivatives trading positions and the manipulation of submissions on other currencies.

2) The submitter at UBS who conducted an analysis as part of the review had been responsible for determining UBS’s dollar submissions between December 2007 to March 2008. UBS took no account of the risks inherent in asking an individual to investigate their own submission.

3) At least two of the managers and one senior manager involved in the 2008 review were aware of the practice of manipulating Libor submissions to benefit trading positions.

4) The 2008 review did not take into account the fact that submissions may be being manipulated to benefit particular trading positions of particular traders. Such misconduct would not necessarily be detected by merely looking at net open derivative positions, because Traders’ positions could “offset” the positions of other traders.

Changes instigated because of the inadequate review included putting responsibility for the integrity and monitoring of the submission process under four managers, all of whom were aware of the manipulation.

The changes did not address the cause of the conflict of interest, nor did procedures introduced, including an “exception reporting regime” detect a single instance of manipulation despite the widespread abuse, the FSA found.